People think if they move into a higher tax bracket, all their income gets taxed at that higher rate.

But, that is not how the U.S. system works.

🧠 First: The U.S. Uses a Progressive Tax System

“Progressive” simply means:

The more you earn, the higher the rate applied to the next dollars you earn. Not all of your dollars.

Only the top layer.

Think of your income like stacked buckets.

Each bucket gets taxed at a different rate.

🪣 How Tax Brackets Actually Work (Conceptually)

Let’s use simple example numbers (not exact bracket thresholds):

Imagine the system looks like this:

• 10% on the first $10,000

• 12% on the next $30,000

• 22% on the next $50,000

• 24% above that

Now let’s say you earn $100,000.

You don’t pay 24% on $100,000.

You pay:

• 10% on the first $10,000

• 12% on the next $30,000

• 22% on the next $50,000

• 24% only on the remaining amount

Each layer is taxed differently.

That’s called marginal tax rates.

🔎 Marginal vs Effective Tax Rate

Two terms you’ll hear:

Marginal Tax Rate

The rate on your next dollar earned.

Effective Tax Rate

The average rate you actually paid across all income.

Most people’s effective rate is much lower than their marginal bracket.

Example:
You might be “in the 22% bracket”
But your effective rate might only be 14–16%.

That distinction matters when planning overtime, bonuses, or Roth conversions.

🧾 Step-by-Step: How Your Taxable Income Is Calculated

Here’s the flow in plain English.

Step 1️⃣ Start With Gross Income

This includes:

• W-2 wages

• Overtime

• Bonuses

• 1099 income

• Interest

• Dividends

• Rental income

• Etc.

Step 2️⃣ Subtract “Above-the-Line” Adjustments

These may include:

• Traditional IRA contributions

• HSA contributions

• Student loan interest (if eligible)

• Self-employed retirement contributions

This gives you Adjusted Gross Income (AGI).

AGI is a critical planning number.

Many tax credits and phaseouts are based on AGI.

Step 3️⃣ Subtract Standard Deduction or Itemized Deductions

Most households take the standard deduction.

This reduces your taxable income further.

Now you have Taxable Income.

That is what the brackets apply to.

Not your full salary.

💰 Why This Matters in Real Life

Understanding this changes how you think about:

• Picking up overtime

• Contributing to a Traditional IRA

• Doing Roth conversions

• Selling investments

• Taking distributions in retirement

Tax planning becomes about:

Managing how much income flows into each bracket layer.

Not avoiding income.

But managing how it stacks.

🏥 Nurse Example

Let’s say a nurse earns $95,000.

She contributes:

• $10,000 to her 403(b)

• $4,000 to an HSA

Now her taxable income may be meaningfully lower than $95,000.

Those pre-tax contributions may:

• Keep her from spilling into the next bracket

• Reduce AGI-based phaseouts

• Lower overall tax bill

Same salary.
Different structure.
Different outcome.

🧠 What I’m Learning in My CFP® Studies

Tax planning is rarely about:

“Pay less tax at all costs.”

It’s about:

When to pay tax.
At what rate.
And how it fits into your lifetime income picture.
For example:

• Paying 22% now might be better than paying 32% later.

• Filling lower brackets intentionally can be strategic.

• Timing income in retirement can reduce lifetime tax burden.

But none of that makes sense unless you understand how the stacking system works.

NurseMoneyDate® Bottom Line

You are not taxed at one flat rate.

You are taxed in layers.

Each additional dollar sits on top of the previous one and is taxed at the rate for that layer.

Once you understand that:

• Overtime feels less scary

• Raises feel clearer

• Retirement withdrawals feel more strategic

• Tax planning becomes intentional

The system is not random.

It’s structured.

And once you understand the structure, you can start making decisions with confidence instead of fear.